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Subject: Entitlement to endorsement as a charitable institution

Question 1

Is the Corporation entitled to endorsement as a tax concession charity pursuant to item 1.1 of section 50-5 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 2

If the Corporation enters into proposed commercial activities with the sole purpose of furthering its charitable objects, will it retain its entitlement to endorsement as a tax concession charity pursuant to item 1.1 of section 50-5 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 3

Is the Company entitled to endorsement as a tax concession charity pursuant to item 1.1 of section 50-5 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 4

If the Company enters into proposed commercial activities with the sole purpose of furthering its charitable objects, will it retain its entitlement to endorsement as a tax concession charity pursuant to item 1.1 of section 50-5 of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commenced on

1 July 2011

Relevant facts and circumstances

The Corporation

The Corporation received endorsement under section 50-105 of the Income Tax Assessment Act 1997 (ITAA 1997) as a charitable institution as described by item 1.1 of section 50-1 of the ITAA 1997.

The Corporation has applied for a private ruling seeking confirmation that proposed commercial activities will not impact its entitlement to tax concession charity endorsement as a charitable institution.

The Corporation has an ABN.

The Corporation holds rights and interests to exclusive use, occupation and possession of land.

The core responsibility of the Corporation is to manage and protect the exclusive rights and interests of the people resident on the land, focusing on the promotion of cultural, social and economic advancement for the current and future generations of the people. The Corporation is extensively involved in a number of ongoing and new projects.

A Land Access Agreement is a standard agreement signed by certain companies to enable those companies to access their tenements and undertake certain activities within the land.

This agreement addresses numerous issues including heritage matters, access, employment, training, the environment and compensation.

The mining projects in the region mean that there are now opportunities for people to link in with the mines and develop small businesses to offer services to the mining companies. The Corporation will ensure that these opportunities are built into the negotiations with mining companies. Examples of services that can be provided to mining companies by the Corporation small businesses include bus services, seed collection, rehabilitation of land, road maintenance, and car hire.

The Corporation has established a unit, which acts also as a central point for the letting of all contracts to businesses as well as providing the opportunity for direct employment. The unit will also provide advice to businesses and the people wanting to start up their own business.

The Corporation is extensively involved in numerous projects for the cultural, social and economic benefit of the current and future generations of the people. In particular the Corporation seeks out and promotes opportunities, including employment opportunities, for people and in particular the people on the land. It also involves assisting with training, employment services and business mentoring for the people.

In seeking to expand opportunities available to the people, the Corporation is considering engaging in certain commercial activities. In this regard it is proposed that an entity associated with the Corporation and third party will provide services to other companies. The Corporation expects to receive an income from the activities, and any such income would only be used to further the objects for which the Corporation was established. In relation to the services provided to the other companies, the Corporation and its associates will be seeking to ensure that contracts and employment opportunities would be provided to certain people and in particular the people of the land.

In anticipation of the proposed commercial activities, the Corporation has arranged for the incorporation of a company, limited by guarantee, with one sole member. The Corporation is the sole shareholder of that sole member. It is anticipated that the Company and a third party would incorporate a jointly owned private company (50% of the shares to be held by each) as the operating entity. Such a company has not yet been incorporated.

From a commercial perspective, the Corporation does not wish to directly enter into transactions with the third party to provide services to other companies to allay any concerns regarding legal liability in respect of matters concerning the services to be provided.

At this stage, the scale of the proposed commercial operation is not known. Accordingly, the proportion of the income of the Corporation and the Company expected to be derived from the commercial activities, and the expenditure expected to be directed to the commercial activities is not known at the current time.

The constituent document of the Corporation currently allows payments to be made to entities with similar objects to itself.

The constituent document contains appropriate non-profit and winding-up clauses and objects pertaining to the welfare of certain people and the maintenance of their culture and tradition.

The Company

The Company received endorsement under section 50-105 of the Income Tax Assessment Act 1997 (ITAA 1997) as a charitable institution as described by item 1.1 of section 50-1 of the ITAA 1997.

The Company has applied for a private ruling seeking confirmation of its entitlement to tax concession charity endorsement as a charitable institution and the impact that proposed commercial activities will have on its tax concession charity status.

The Company has an ABN and is a company limited by guarantee.

The Company has one sole member. In turn, the sole shareholder of that sole member is the Corporation. The Corporation received endorsement as a charitable institution and has essentially the same objects in its constituent document as the Company.

It is anticipated that the Company and a "Third Party Manager" (TP) will incorporate a jointly owned private company (50% of the shares to be held by each) as an operating entity, to undertake commercial activities. Such a company has not yet been incorporated.

From a commercial perspective, the Corporation does not wish to directly enter into transactions with TP to provide services to companies to allay any concerns regarding legal liability in respect of matters concerning the services to be provided.

Further, it is proposed that the Company would not directly transact with TP to provide relevant services. In this regard, if anticipated commercial activities are successful it is possible that the Company may be able to enter into various incorporated joint ventures with various TP's.

Accordingly, 50% of the profit derived from the commercial activities would be received by way of a dividend paid from the as yet unincorporated entity to the Company. The remaining 50% would be paid to TP.

The Company may use some of the income derived from the dividends for its own objects, which are currently endorsed as charitable by the Commissioner. These charitable objects are intended to be realised via activities, not as yet underway, that will include assisting with training, employment services and business mentoring for the people, who are the owners of the region in question (these activities are anticipated to commence in the near future). Some or all of the income may be paid by the Company to the Corporation or to other organisations with purposes similar to those of the Company, in aid of the endorsed charitable purposes of the Company.

At this stage, the scale of the proposed commercial operation is not known. Accordingly, the proportion of the income of the Corporation and the Company expected to be derived from the commercial activities, and the expenditure expected to be directed to the commercial activities is not currently known. However, if the activities are successful, the income which may be derived from the commercial activities by the Company may be virtually 100% of the total income.

The details regarding the provision of funding to the Company have not been finalised. However, the constituent document of the Corporation currently allows payments to be made to entities with similar objects to itself. Accordingly, the Corporation may elect to make a payment to the Company in furtherance of the objects of the Corporation.

There are several directors of the Company.

The constituent document contains appropriate non-profit and winding-up clauses and objects pertaining to the welfare of certain people and the maintenance of their culture and tradition.

Relevant legislative provisions

Section 50-5 of the Income Tax Assessment Act 1997

Section 50-50 of the Income Tax Assessment Act 1997

Section 50-52 of the Income Tax Assessment Act 1997

Section 50-105 of the Income Tax Assessment Act 1997

Section 50-110 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1.

Summary

Since its incorporation the Corporation has met the requirements of a charitable institution.

Detailed reasoning

Charitable Institution

Under section 50-110 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity is entitled to endorsement if it meets the following requirements:

a) It has an ABN;

b) It is a charitable fund or institution covered by section 50-5 of the ITAA 1997; and

c) It satisfies the special conditions of section 50-5 of the ITAA 1997.

ABN

To be endorsed as an income tax exempt charity, an entity must have an ABN. The Corporation has an ABN. This requirement is satisfied.

A charitable fund or institution covered by section 50-5 of the ITAA 1997

The phrase 'charitable institution' is not defined in any Act.

In the High Court case of Young Men's Christian Association v. Federal Commissioner of Taxation (1926) 37 CLR 351 Higgins J said:

The very recent case of Chesterman v. Federal Commissioner of Taxation (1925) 37 CLR 317, on appeal to the Judicial Committee, shows that we are to consider the word "charitable" in the technical sense, and not in any popular sense of eleemosynary, etc.

In the High Court case of Incorporated Council of Law Reporting (Queensland) v. Federal Commissioner of Taxation (1971) 125 CLR 659; 2 ATR 515 (Incorporated Council case) Barwick, CJ said:

The Act (Income Tax and Social Services Contribution Assessment Act 1936-1962) attempts no definition of charity or of what for its purposes will be charitable. But having regard to the decision of the Privy Council in Chesterman v Federal Commissioner of Taxation (1925), 37 CLR 317, it must be taken that whether or not the institution is relevantly charitable will be determined according to the principles upon which the Court of Chancery would act in connexion with an alleged charity. That means that the indications contained in the preamble to the Statute of Elizabeth 1601 and the classifications in Lord MacNaughten's speech in Commissioner for Special Purposes of Income Tax v Pemsel [1891] AC 531, at p 583; [1891-4] All ER Rep. 28, at p 55, are to be observed in deciding whether or not the institution is charitable for the purposes of the Act.

The classifications in Lord MacNaughten's speech, in Pemsel's case, to which Barwick CJ referred were expressed by His Lordship as:

"Charity" in its legal sense comprises four principal divisions: trusts for the relief of poverty; trusts for the advancement of education; trusts for the advancement of religion; and trusts for other purposes beneficial to the community, not falling under any of the preceding heads.

Although the word 'charitable' is not defined by the ITAA 1997, it has an established legal meaning through case law. Based on common law the characteristics of a charity are:

· It is an entity that is also a fund or an institution;

· It exists for the public benefit or the relief of poverty;

· Its sole or dominant purposes are charitable within the legal sense of that term; and

· It is non-profit.

A fund or institution

The meaning of the term "institution" was considered in Mayor of Manchester v. McAdam (1896) AC 500 where Lord McNaughten said at p511-512:

It is a little difficult to define the meaning of the term "institution" in the modern acceptation of the word. It means, I suppose, an undertaking formed to promote some defined purpose having in view generally the instruction or education of the public. It is (a) body (so to speak) called into existence to translate the purpose as conceived in the mind of the founders into a living and active principle. Sometimes the word is used to denote merely the local habitation or the headquarters of the institution. Sometimes it comprehends everything that goes to make up the institution - everything belonging to the undertaking in connection with the purpose which informs and animates the whole.

The Courts have also decided that whether an entity is an institution depends upon a number of factors including its activities, size and permanence. However, an entity is not an institution if it merely manages property and makes distributions to other organisations (Trustees of the Allport Bequest v. FCT 88 ATC 4436), or is an entity which is established, controlled and operated by family members and friends (Pamas Foundation (Inc) v. DFC of T 92 ATC 4161).

The Corporation is governed by its constitution, has a series of activities it proposes to carry out and is administered by independent directors.

It is accepted that the Corporation is an institution.

Public benefit or the relief of poverty

A charitable institution provides benefits to the community generally. An exception is the purpose of the relief of poverty.

Since the Corporation has as one of its stated objects "the direct relief of poverty", it meets this characteristic of a charity on the assumption that its activities align with this objective. The projects that the Corporation is involved in have the ultimate purpose of furthering the Corporation's objects, however it is not clear at present how the Corporation relieves poverty directly. Consequently the public benefit test will also be examined.

In the High Court case of Thompson v. Federal Commissioner of Taxation (1959) 102 CLR 315 Menzies J. said:

So too in Inland Revenue Commissioners v. Baddeley (1955) AC 572 , the House of Lords decided that a trust for the social and physical training and recreation of Methodists resident in two county boroughs was not charitable because the necessary element of public benefit was lacking. Viscount Simonds went further and said that a trust "cannot qualify as a charity within the fourth class in Income Tax Commissioners v. Pemsel (1891) AC 531 if the beneficiaries are a class of persons not only confined to a particular area but selected from within it by reference to a particular creed." (1955) AC, at p 592

In the same case, Dixon C.J. said:

Not a little difficulty has been felt in defining the conception of "public", "public charity" or "public benefit" which this involves but the contrast is, of course, to private advantage. In re Scarisbrick; Cockshott v. Public Trustee (1951) Ch 622 Jenkins LJ set out five general propositions upon this subject, in relation however to a case concerned with the relief of poverty. His Lordship in doing so said: "An aggregate of individuals ascertained by reference to some personal tie (e.g., of blood or contract, such as the relations of a particular individual, the members of a particular family, the employees of a particular firm, the members of a particular association, does not amount to the public or a section thereof for the purposes of the general rule" (1951) Ch, at p 649 (The italics are mine) (at p322)

Charities are altruistic and exist for the benefit of the community or the relief of poverty. If an entity limits benefits on the basis of family ties, employment with a particular employer or membership of a particular association, it will not be a charity unless its purpose is to relieve poverty.

The Corporation's ultimate hope is that the activities they undertake will help to relieve poverty in certain communities while at the same time preserving certain culture. Although The Corporation's focus is mainly on the people of the land it does not mean that the organisation as a whole must limit its activities based on certain ties.

The goals of the organisation clearly indicate that they exist to help certain people. This aligns with the Corporation's activities which ensure that negotiations with mining companies involve opportunities for the people and businesses to link into their projects. There is no clause that limits their activities exclusively to these people. The fact that the Corporation at this present time are mainly involved with the people does not indicate that they will not be working with other groups in the future.

Based on the information provided by the Corporation it is accepted that it meets all the criteria to be considered in the benefit of the public.

Charitable sole or dominant purpose

As set out at paragraph 12 of Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities, charitable purposes are commonly grouped as the 'four heads' of charity, i.e.:

· the relief of poverty;

· the advancement of education;

· the advancement of religion; and

· other purposes beneficial to the community.

TR 2011/4 specifically lists the welfare of certain persons as an example of charitable purposes under the fourth head of charity. The Corporation's objects fall variously within the examples given.

In short, it is accepted that the charitable objects listed in the Corporation's constitution would all, variously, fall within the 'four heads' of charity, as per the explanations contained in TR 2011/4 and the ITGNPO. In conjunction with its activities that include assisting with training, employment services and business mentoring for the people, the Corporation has a solely charitable purpose.

Non-profit

A charitable institution is carried out without purpose of private gain for particular persons including its individual members. If an organisation was carried on for the profit of its members or owners, it would be for their benefit and not for the benefit of the public. The constituent documents or rules governing its activities must state that any income or property cannot be distributed to members. This includes preventing transfers to other organisations which do not have the appropriate non-profit clauses in their constitutions or rules.

Page 8 of the ATO publication Income tax guide for non-profit organisations states:

The Tax Office accepts an organisation as non-profit where its constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people. This applies both while the organisation is operating and when it winds up.

The Corporation's constitution contains appropriate non-profit and winding up clauses that prevent profits or gains going to its members. It is accepted as a non-profit entity.

It satisfies the special conditions of section 50-5 of the ITAA 1997.

Sections 50-50 and 50-52 of the ITAA 1997 must be satisfied in order to qualify for endorsement as a charitable institution under item 1.1. Section 50-50 states:

An entity covered by item 1.1 or 1.2 is not exempt from income tax unless the entity:

a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

b) is an institution that meets the description and requirements in item 1 of the table in section 30-15; or

c) is a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident; or

d) is a prescribed institution that has a physical presence in Australia but which incurs its expenditure and pursues its objectives principally outside Australia.

Note 1: Certain distributions may be disregarded: see section 50-75

To meet special condition (a) a charitable institution must meet two requirements. First, it must have a physical presence in Australia and second, to the extent it has a physical presence in Australia, it must incur its expenditure and pursue its objectives principally in Australia.

The Corporation pursues its purposes in Australia and will incur its expenditure principally within Australia. It meets the condition of paragraph (a) and consequently satisfies the special conditions.

Conclusion

The Corporation meets all the characteristics of a charitable institution. In accordance with section 50-110 of the ITAA 1997 it is entitled to tax concession charity endorsement as a charitable institution as described by item 1.1 of section 50-1 of the ITAA 1997.

Question 2.

Summary

The Corporation will continue to meet the requirements of a charitable institution. Although it intends to undertake commercial activities, these will be in furtherance of charitable objects. As per the decision in Federal Commissioner of Taxation v. Word Investments Limited (2008) 236 CLR 204; [2008] HCA 55 (Word Investments), the commercial activities have an ultimate charitable purpose, which consequently enables the Corporation to retain its tax concession charity endorsement.

Detailed reasoning

The Corporation is endorsed as a charitable institution. Its charitable objects fall within the 'four heads' of charity.

However, the Corporation has indicated that it will engage with third parties to undertake commercial activities. The aim of undertaking such activities is twofold, namely:

· to conduct charitable activities including assisting with training, employment services and business mentoring for the people; and

· to further the endorsed charitable purposes of the Company by providing profits to the Corporation and other charitable institutions with similar objects to its own.

The Corporation therefore finds itself in a position where its objects are charitable, yet some of its intended activities, being commercial in nature, are not. TR 2011/4 provides guidance, when it states at paragraph 198:

Where the constituent documents of an institution indicate it has a charitable purpose, it does not matter that its activities may not be intrinsically charitable. It is the purpose in furtherance of which the activities are carried out, and not the character of the activities themselves, that determines whether an institution has a charitable purpose.

The principle described here is that it is the ultimate purpose of the activities that is critical in determining charitable purpose. Paragraphs 199 and 200 further elucidate:

199. For example, in Word Investments a company at various times carried on an investment business and a funeral business to provide funds to another charitable institution to enable that other institution to undertake charitable activities. The High Court found that the company that carried on those businesses was itself a charitable institution. It said that the company was charitable because its purpose was charitable, and that it was simply using its powers to employ commercial methods to raise money for that charitable purpose:

... Word has only one group of objects - a group of objects of advancing religious charitable purposes. All other 'objects' which may seem to be outside that group are on their true construction either objects within that group, or powers to carry out objects within that group.

200. This does not mean that an entity that carries on a commercial enterprise will be charitable simply because it gives some or all of its profits to a charitable institution. The enquiry is always centred on whether the sole purpose of the donor entity is charitable.

Where the purpose of an institution that carries on a commercial enterprise and gives its profits to other charitable institutions is charitable, the Commissioner will accept that the profits given to the other charitable institutions are applied for charitable purposes. Therefore, as with Word Investments, the Corporation will still be considered to have a solely charitable purpose - to provide profits to the Company (an endorsed charitable institution) and other charitable institutions with similar objects to its own -since its commercial activities are to be undertaken with the sole aim of furthering its charitable objects.

Although the Corporation will have a solely charitable purpose, since it is intended that it may distribute some or all of its profits to the Company, a closely related entity, the nature of this arrangement must be scrutinised. It must be ascertained whether this arrangement could be construed as conferring private benefits. TR 2011/4 again provides guidance:

241. An institution's actions must be consistent with a prohibition on the institution's funds and assets finding their way to particular persons such as owners, their associates or nominees, or members, in a private capacity. Such distributions - whether made directly or by indirect means - are inconsistent with the institution not being carried on for the purpose of private profit or gain.

242. However, distributions of profits (or the potential for distributions of profits) from a commercial activity to owners or members will not always result in a private benefit to the owner or member. In Word Investments the High Court concluded that a company limited by guarantee that gave its profits to a Christian missionary organisation and other similar organisations was a charitable institution. The recipients were not actually members of the company, but were closely related. The High Court held that an institution could be charitable even where it did not engage in charitable activities itself but instead made profits that were directed to charitable institutions which did engage in charitable activities. It said that no distinction should be drawn between a company limited by guarantee with charitable objects that operated two divisions to effect its charitable purpose, and a company limited by guarantee that had the same objects and made the same profits as the first but gave those profits to other organisations which spent them on those objects.

243. On the basis of the decision in Word Investments, critical questions in circumstances similar to those considered in that case are whether the institution has charitable as opposed to purely commercial objects, and whether the application or distribution of profits is in furtherance of those charitable objects. The fact that the recipient could be an owner or member of the institution does not alter the characterisation of the institution as long as:

· the sole purpose of the institution making the distribution is charitable;

· its constituent documents allow it to distribute its surplus or profit to another entity or entities in order to effect that sole charitable purpose; and

· its constituent documents restrict potential recipients of the surplus or profit to charitable entities that have a similar charitable purpose as the institution itself.

In these circumstances, the Commissioner will accept that the distribution of profit is not for the private benefit of the members or owners but for the benefit of the public generally.

The Corporation satisfies each of the three dot points listed at paragraph 243 of TR 2011/4 - the sole purpose of its distributions is charitable; its constitution allows it to distribute profits to effect that charitable purpose; and the constitution stipulates that recipients must have similar objects to itself.

As with the reasoning in relation to Word Investments above, it is accepted by the Commissioner that the distribution of profit is not for the private benefit of the members or owners but for the benefit of the public generally. The Corporation will continue to meet the non-profit requirement.

Conclusion

The Corporation's status as a charitable institution will not be impacted by its intended commercial activities. It still has a solely charitable purpose and continues to be a non-profit entity.

In accordance with section 50-110 of the ITAA 1997 it will remain entitled to tax concession charity endorsement as a charitable institution as described by item 1.1 of section 50-1 of the ITAA 1997.

Question 3.

Summary

Since its incorporation the Company has met the requirements of a charitable institution.

Detailed reasoning

Charitable Institution

Under section 50-110 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity is entitled to endorsement if it meets the following requirements:

a) It has an ABN,

b) It is a charitable fund or institution covered by section 50-5 of the ITAA 1997, and

c) It satisfies the special conditions of section 50-5 of the ITAA 1997.

ABN

To be endorsed as an income tax exempt charity, an entity must have an ABN. The Company has an ABN. This requirement is satisfied.

A charitable fund or institution covered by section 50-5 of the ITAA 1997

The phrase 'charitable institution' is not defined in any Act.

In the High Court case of Young Men's Christian Association v. Federal Commissioner of Taxation (1926) 37 CLR 351 Higgins J said:

The very recent case of Chesterman v. Federal Commissioner of Taxation (1925) 37 CLR 317, on appeal to the Judicial Committee, shows that we are to consider the word "charitable" in the technical sense, and not in any popular sense of eleemosynary, etc.

In the High Court case of Incorporated Council of Law Reporting (Queensland) v. Federal Commissioner of Taxation (1971) 125 CLR 659; 2 ATR 515 (Incorporated Council case) Barwick, CJ said:

The Act (Income Tax and Social Services Contribution Assessment Act 1936-1962) attempts no definition of charity or of what for its purposes will be charitable. But having regard to the decision of the Privy Council in Chesterman v Federal Commissioner of Taxation (1925), 37 CLR 317, it must be taken that whether or not the institution is relevantly charitable will be determined according to the principles upon which the Court of Chancery would act in connexion with an alleged charity. That means that the indications contained in the preamble to the Statute of Elizabeth 1601 and the classifications in Lord MacNaughten's speech in Commissioner for Special Purposes of Income Tax v Pemsel [1891] AC 531, at p 583; [1891-4] All ER Rep. 28, at p 55, are to be observed in deciding whether or not the institution is charitable for the purposes of the Act.

The classifications in Lord MacNaughten's speech, in Pemsel's case, to which Barwick CJ referred were expressed by His Lordship as:

"Charity" in its legal sense comprises four principal divisions: trusts for the relief of poverty; trusts for the advancement of education; trusts for the advancement of religion; and trusts for other purposes beneficial to the community, not falling under any of the preceding heads.

Although the word 'charitable' is not defined by the ITAA 1997, it has an established legal meaning through case law. Based on common law the characteristics of a charity are:

· It is an entity that is also a fund or an institution;

· It exists for the public benefit or the relief of poverty;

· Its sole or dominant purposes are charitable within the legal sense of that term; and

· It is non-profit.

A fund or institution

The meaning of the term "institution" was considered in Mayor of Manchester v. McAdam (1896) AC 500 where Lord McNaughten said at p511-512:

It is a little difficult to define the meaning of the term "institution" in the modern acceptation of the word. It means, I suppose, an undertaking formed to promote some defined purpose having in view generally the instruction or education of the public. It is (a) body (so to speak) called into existence to translate the purpose as conceived in the mind of the founders into a living and active principle. Sometimes the word is used to denote merely the local habitation or the headquarters of the institution. Sometimes it comprehends everything that goes to make up the institution - everything belonging to the undertaking in connection with the purpose which informs and animates the whole.

The Courts have also decided that whether an entity is an institution depends upon a number of factors including its activities, size and permanence. However, an entity is not an institution if it merely manages property and makes distributions to other organisations (Trustees of the Allport Bequest v. FCT 88 ATC 4436), or is an entity which is established, controlled and operated by family members and friends (Pamas Foundation (Inc) v. DFC of T 92 ATC 4161).

The Company is a company limited by guarantee. It is governed by its constitution, has a series of activities it proposes to carry out and is administered by three independent directors.

It is accepted as that the Company is an institution.

Public benefit or the relief of poverty

A charitable institution provides benefits to the community generally. An exception is the purpose of the relief of poverty.

Since the Company has as one of its stated objects "the direct relief of poverty", it meets this characteristic of a charity on the assumption that its activities align with this objective. The activities that the Company is involved in have the ultimate purpose of furthering the Company's objects; however it is not clear at present how the Company intends to relieve poverty directly. Consequently, the public benefit test will also be examined.

In the High Court case of Thompson v. Federal Commissioner of Taxation (1959) 102 CLR 315 Menzies J. said:

So too in Inland Revenue Commissioners v. Baddeley (1955) AC 572 , the House of Lords decided that a trust for the social and physical training and recreation of Methodists resident in two county boroughs was not charitable because the necessary element of public benefit was lacking. Viscount Simonds went further and said that a trust "cannot qualify as a charity within the fourth class in Income Tax Commissioners v. Pemsel (1891) AC 531 if the beneficiaries are a class of persons not only confined to a particular area but selected from within it by reference to a particular creed." (1955) AC, at p 592

In the same case, Dixon C.J. said:

Not a little difficulty has been felt in defining the conception of "public", "public charity" or "public benefit" which this involves but the contrast is, of course, to private advantage. In re Scarisbrick; Cockshott v. Public Trustee (1951) Ch 622 Jenkins LJ set out five general propositions upon this subject, in relation however to a case concerned with the relief of poverty. His Lordship in doing so said: "An aggregate of individuals ascertained by reference to some personal tie (e.g., of blood or contract, such as the relations of a particular individual, the members of a particular family, the employees of a particular firm, the members of a particular association, does not amount to the public or a section thereof for the purposes of the general rule" (1951) Ch, at p 649 (The italics are mine) (at p322).

Charities are altruistic and exist for the benefit of the community or the relief of poverty. If an entity limits benefits on the basis of family ties, employment with a particular employer or membership of a particular association, it will not be a charity unless its purpose is to relieve poverty.

The Company's ultimate hope is that the activities they undertake will help to relieve poverty in certain communities while at the same time preserving culture. Although the Company's focus is mainly on the people of the land it does not mean that the organisation as a whole must limit its activities based on certain ties.

The goals of the organisation clearly indicate that they exist to help the people. This aligns with their proposed activities of assisting with training, employment services and business mentoring for the people. There is no clause that limits their activities exclusively to these people. The fact that the Company at this present time are mainly involved with the people does not indicate that they will not be working with other groups in the future.

Based on the information provided by the Company it is accepted that it meets all the criteria to be considered in the benefit of the public.

Charitable sole or dominant purpose

As set out at paragraph 12 of Taxation Ruling TR 2011/4 Income tax and fringe benefits tax: charities, charitable purposes are commonly grouped as the 'four heads' of charity, i.e.:

· the relief of poverty;

· the advancement of education;

· the advancement of religion; and

· other purposes beneficial to the community.

TR 2011/4 specifically lists the welfare of certain persons as an example of charitable purposes under the fourth head of charity. The Company's objects fall variously within the examples given.

In short, it is accepted that the charitable objects listed in the Company's constitution would all, variously, fall within the 'four heads' of charity, as per the explanations contained in TR 2011/4 and the ITGNPO. In conjunction with its proposed activities that are anticipated to commence in the near future, including assisting with training, employment services and business mentoring for the people, the Company has a solely charitable purpose.

Non-profit

A charitable institution is carried out without purpose of private gain for particular persons including its individual members. If an organisation was carried on for the profit of its members or owners, it would be for their benefit and not for the benefit of the public. The constituent documents or rules governing its activities must state that any income or property cannot be distributed to members. This includes preventing transfers to other organisations which do not have the appropriate non-profit clauses in their constitutions or rules.

Page 8 of the ATO publication Income tax guide for non-profit organisations states:

The Tax Office accepts an organisation as non-profit where its constituent or governing documents prevent it from distributing profits or assets for the benefit of particular people. This applies both while the organisation is operating and when it winds up.

The Company's constitution contains appropriate non-profit and winding up clauses that prevent profits or gains going to its members. It is accepted as a non-profit entity.

It satisfies the special conditions of section 50-5 of the ITAA 1997.

Sections 50-50 and 50-52 of the ITAA 1997 must be satisfied in order to qualify for endorsement as a charitable institution under item 1.1. Section 50-50 states:

An entity covered by item 1.1 or 1.2 is not exempt from income tax unless the entity:

a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

b) is an institution that meets the description and requirements in item 1 of the table in section 30-15; or

c) is a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident; or

d) is a prescribed institution that has a physical presence in Australia but which incurs its expenditure and pursues its objectives principally outside Australia.

Note 1: Certain distributions may be disregarded: see section 50-75

To meet special condition (a) a charitable institution must meet two requirements. First, it must have a physical presence in Australia and second, to the extent it has a physical presence in Australia, it must incur its expenditure and pursue its objectives principally in Australia.

The Company pursues its purposes in the Australia and will incur its expenditure principally within Australia. It meets the condition of paragraph (a) and consequently satisfies the special conditions.

Conclusion

The Company meets all the characteristics of a charitable institution. In accordance with section 50-110 of the ITAA 1997 it is entitled to tax concession charity endorsement as a charitable institution as described by item 1.1 of section 50-1 of the ITAA 1997.

Question 4.

Summary

The Company will continue to meet the requirements of a charitable institution. Although it intends to undertake commercial activities, these will be in furtherance of charitable objects. As per the decision in Federal Commissioner of Taxation v. Word Investments Limited (2008) 236 CLR 204; [2008] HCA 55 (Word Investments), the commercial activities have an ultimate charitable purpose, which consequently enables the Company to retain its tax concession charity endorsement.

Detailed reasoning

It has been established that the Company is currently entitled to its endorsement as a charitable institution. The charitable objects listed in the Company's constitution would all, variously, fall within the 'four heads' of charity.

However, the Company has indicated that it will engage with third parties to undertake commercial activities. The aim of undertaking such activities is twofold, namely:

· to conduct charitable activities including assisting with training, employment services and business mentoring for the people; and

· to further the endorsed charitable purposes of the Company by providing profits to the Corporation and other charitable institutions with similar objects to its own.

The Company therefore finds itself in a position where its objects are charitable, yet some of its intended activities, being commercial in nature, are not. TR 2011/4 provides guidance, when it states at paragraph 198:

Where the constituent documents of an institution indicate it has a charitable purpose, it does not matter that its activities may not be intrinsically charitable. It is the purpose in furtherance of which the activities are carried out, and not the character of the activities themselves, that determines whether an institution has a charitable purpose.

The principle described here is that it is the ultimate purpose of the activities that is critical in determining charitable purpose. Paragraphs 199 and 200 further elucidate:

199. For example, in Word Investments a company at various times carried on an investment business and a funeral business to provide funds to another charitable institution to enable that other institution to undertake charitable activities. The High Court found that the company that carried on those businesses was itself a charitable institution. It said that the company was charitable because its purpose was charitable, and that it was simply using its powers to employ commercial methods to raise money for that charitable purpose:

... Word has only one group of objects - a group of objects of advancing religious charitable purposes. All other 'objects' which may seem to be outside that group are on their true construction either objects within that group, or powers to carry out objects within that group.

200. This does not mean that an entity that carries on a commercial enterprise will be charitable simply because it gives some or all of its profits to a charitable institution. The enquiry is always centred on whether the sole purpose of the donor entity is charitable.

Where the purpose of an institution that carries on a commercial enterprise and gives its profits to other charitable institutions is charitable, the Commissioner will accept that the profits given to the other charitable institutions are applied for charitable purposes. Therefore, as with Word Investments, the Company will still be considered to have a solely charitable purpose - to provide profits to the Corporation (an endorsed charitable institution) and other charitable institutions with similar objects to its own -since its commercial activities are to be undertaken with the sole aim of furthering its charitable objects.

Although the Company will have a solely charitable purpose, since it is intended that the Company will distribute some or all of its profits to the Corporation, a closely related entity, the nature of this arrangement must be scrutinised. It must be ascertained whether this arrangement could be construed as conferring private benefits. TR 2011/4 again provides guidance:

241. An institution's actions must be consistent with a prohibition on the institution's funds and assets finding their way to particular persons such as owners, their associates or nominees, or members, in a private capacity. Such distributions - whether made directly or by indirect means - are inconsistent with the institution not being carried on for the purpose of private profit or gain.

242. However, distributions of profits (or the potential for distributions of profits) from a commercial activity to owners or members will not always result in a private benefit to the owner or member. In Word Investments the High Court concluded that a company limited by guarantee that gave its profits to a Christian missionary organisation and other similar organisations was a charitable institution. The recipients were not actually members of the company, but were closely related. The High Court held that an institution could be charitable even where it did not engage in charitable activities itself but instead made profits that were directed to charitable institutions which did engage in charitable activities. It said that no distinction should be drawn between a company limited by guarantee with charitable objects that operated two divisions to effect its charitable purpose, and a company limited by guarantee that had the same objects and made the same profits as the first but gave those profits to other organisations which spent them on those objects.

243. On the basis of the decision in Word Investments, critical questions in circumstances similar to those considered in that case are whether the institution has charitable as opposed to purely commercial objects, and whether the application or distribution of profits is in furtherance of those charitable objects. The fact that the recipient could be an owner or member of the institution does not alter the characterisation of the institution as long as:

· the sole purpose of the institution making the distribution is charitable;

· its constituent documents allow it to distribute its surplus or profit to another entity or entities in order to effect that sole charitable purpose; and

· its constituent documents restrict potential recipients of the surplus or profit to charitable entities that have a similar charitable purpose as the institution itself.

In these circumstances, the Commissioner will accept that the distribution of profit is not for the private benefit of the members or owners but for the benefit of the public generally.

The Company satisfies each of the three dot points listed at paragraph 243 of TR 2011/4 - the sole purpose of its distributions is charitable; its constitution allows it to distribute profits to effect that charitable purpose; and the constitution stipulates that recipients must have similar objects to itself.

As with the reasoning in relation to Word Investments above, it is accepted by the Commissioner that the distribution of profit is not for the private benefit of the members or owners but for the benefit of the public generally. The Company will continue to meet the non-profit requirement.

Conclusion

The Company's status as a charitable institution will not be impacted by its intended commercial activities. It still has a solely charitable purpose and continues to be a non-profit entity.

In accordance with section 50-110 of the ITAA 1997 it will remain entitled to tax concession charity endorsement as a charitable institution as described by item 1.1 of section 50-1 of the ITAA 1997.